Leaving an LLC
Leaving an LLC is not typically something you think about when you start an LLC with your partners. However, there are plenty of reasons down the road why you or any of your partners might want to withdraw from the LLC. For example, (i) the LLC might not be able to achieve the primary purpose for which it was formed, (ii) another key owner (member) is not able or willing to carry his or her weight, (iii) other members might want to take the LLC in a different direction, or (iv) one or more member has breached the operating agreement. If what started out as a hopeful enterprise turns into a disappointment, how do you withdraw from the LLC?
That largely depends on the operating agreement. Under Missouri law, a member may withdraw from an LLC as provided in the operating agreement, or 90 days after giving written notice of the withdrawal to all of the other members. If the withdrawal breaches any term of the operating agreement, then the LLC can recover damages from the withdrawing member. The LLC can even recover these damages by withholding the distributions owed to the withdrawing member.
Recovering Your Membership Interest
The next immediate question is how you recover your interest in the LLC if you decide to withdraw. That may depend on whether your withdrawal triggers a dissolution of the LLC. If the operating agreement provides for the dissolution of the LLC in the event of a member’s withdrawal, then under Missouri law, unless the operating agreement provides otherwise, the member will receive the member’s proportional share of distributions from the LLC until the LLC is terminated.
If the withdrawal does not trigger a dissolution of the LLC, then under Missouri law, unless the operating agreement provides otherwise, the member may within 180 days of withdrawing from the LLC demand the fair market value of the member’s interest in the LLC. If such demand is not made, then the LLC can under certain circumstances purchase the member’s interest at its fair market value.
Involuntary Withdrawal
While a member can voluntarily choose to withdraw from an LLC, under Missouri law, a member ceases to be a member, unless otherwise provided by the operating agreement, if the member (i) assigns all of the member’s interest in the LLC, (ii) is expelled in accordance with the operating agreement, (iii) is the subject of a bankruptcy, (iv) seeks to be reorganized, liquidated or placed in receivership, (v) dies, (vi) is deemed incompetent, or (vii) ceases to carry on as a business, trust or other legal entity.
Regardless of how or why a member leaves the LLC, the withdrawn member, unless provided otherwise by the operating agreement, ceases to have any duties to the LLC, except that the withdrawn member is obligated to account to the LLC for: (i) any profit gained by the member from any transaction between the member and the LLC, (ii) any personal use of LLC property by the withdrawn member, (iii) any personal use by the member of any proprietary or confidential information of the LLC, or (iv) any other similar matters.
Conversely, unless provided otherwise by the operating agreement, a withdrawn member has no right to participate in the management of the LLC after the member has withdrawn, and the member will thereafter only have a right to the distributions described above.
Put it in the Operating Agreement
As you can see, Missouri’s LLC law provides a lot of leeway to the members to determine when a member will cease to be a member, what happens to the LLC when a member withdraws, and what rights and obligations the withdrawing member has after the member has withdrawn. One of the big issues is how to value the membership interest of the withdrawing member and when and how the withdrawing member is entitled to receive that interest from the LLC. The right time to discuss these issues is when drafting the operating agreement. If it’s not in the operating agreement, you will probably be stuck with whatever Missouri law has to say about it.
The information provided in this article is general in nature, and it is not intended as legal advice. Your circumstances may be unique, and you should therefore consult knowledgeable legal counsel about how the information or concepts discussed in this article might apply to you or your business.
Michael Sewell has an MBA and JD, numerous years of high level business experience with multi-billion dollar corporations, and he has practiced law in Missouri since 2005. Michael Sewell is the owner of Sewell Law, LC, which helps clients with LLC formations, private securities offerings, and litigation.
Feel free to contact Michael at 314.261.7528.
This article was published on April 16, 2015.
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